New Legislation Affects Liability Under CERCLA

The Small Business Liability and Brownfields Revitalization Act (the "Act"), signed into law by President Bush on January 11, 2002, makes important and long-overdue changes to the liability provisions of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). The Act consists of two titles--Title I, The Small Business Liability Relief Act, which creates liability exemptions for small businesses and others sending municipal solid waste or very small amounts of hazardous waste to Superfund sites, and Title 2, The Brownfields Revitalization Act, which contains broad changes to CERCLA liability for those purchasing contaminated property.

Most significantly, the Act creates an exemption from CERCLA liability for "bona fide prospective purchasers" of contaminated property. This exemption applies to straightforward real property transactions as well as to corporate asset purchase transactions where contaminated property is among the assets of the target company. The exemption would not apply, however, to acquisitions of the stock of a company that is a potentially liable party under CERCLA.

Clearer Path to Brownfields Redevelopment

The prospective purchaser exemption resolves the problem of lingering federal CERCLA liability, which many consider to be the most significant obstacle to brownfields redevelopment. The exemption is not automatic, however--purchasers must meet specific requirements to qualify.

To be a "bona fide prospective purchaser," a person must:

• acquire the contaminated property after January 11, 2002,

• cooperate with response actions at the property and respond to EPA information requests,

• exercise due care in managing hazardous substances on site,

• make all legally required reports of the discovery or release of hazardous substances,

• make inquiries during the due diligence process about past uses and owners of the property in a manner consistent with ASTM standards for performing a Phase I Environmental Site Assessment,

• not be a successor business organization of a potentially liable party at the site, and

• not have any family, contractual, corporate or financial relationships with any potentially liable party at the site (other than those relationships involving the transfer of title in the property or financing-related security interests in the property).

These requirements are generally consistent with good property management and regulatory compliance practices and should be readily achievable. It is essential, however, for the purchaser of contaminated property to actively manage its compliance with the bona fide prospective purchaser requirements to ensure continued application of the exemption.

Beware the Act's Lien Provision

Not surprisingly, Congress could not give away a liability exemption without taking something back. In this case, the Act creates a lien on the property in favor of the U.S. Environmental Protection Agency ("EPA") at sites where the EPA has unrecovered response costs and where the response action increases the value of the property. The amount of the lien is the lesser of the unrecovered response costs and the increase in property value. The lien remains on the property until the EPA has recovered its response costs or until the lien is satisfied by sale or other means. For those sites with extensive EPA involvement, the lien could be substantial and should be carefully considered in deciding whether to buy the property. When the EPA's involvement at a site is minimal or nonexistent, the lien is less of an issue.

Innocent Purchaser and Adjacent Property Defenses Clarified

The Act also clarifies CERCLA liability defenses for those owning property that is contaminated by pollutants migrating from an adjacent property, as well as those who purchase contaminated property without knowledge of the contamination. These defenses hinge on appropriate inquiry before purchasing the property (again, with an ASTM Phase I as the standard for appropriate inquiry) and whether the purchaser knew or should have known of site contamination. Knowledge or constructive knowledge of contamination defeats these defenses.

The Act Encourages States to Act

It is important to remember that the Act pertains only to federal CERCLA liability--it does not affect cleanup liability under state law. To address state liability, those purchasing contaminated property may enter prospective purchaser agreements or voluntary cleanup programs now available in most states.

An underlying principle of the Act is that states are better equipped to handle brownfields programs than the EPA. To help states in this regard, the Act contains three additional provisions. First, the Act creates an enforcement ban prohibiting the EPA from bringing a CERCLA enforcement action at a site that is the subject of a state response action. Second, the Act provides for federal grants for states to enhance or establish state brownfields programs. Third, the Act provides for an increase in funding for state and local governments and quasi-governmental agencies to investigate and clean up brownfields.

Small Business Treatment

Another main component of the Act relates to small business liability relief for liabilities at sites on the National Priorities List (or Superfund List). The applicable provisions include a de micromis liability exemption for those parties that generate or transport small amounts of hazardous waste to Superfund sites, and liability exemptions for small businesses and charities that send municipal solid waste to Superfund sites.

Conclusion

The Act significantly alters the CERCLA liability landscape, particularly with respect to brownfields. We have carefully analyzed the Act's provisions and are ready to discuss with you how to take advantage of the benefits of the Act in your future property purchase and development decisions.